Patient investors may well be rewarded as the milk industry navigates a ‘perfect storm’

Aussie dairy industry finds itself in a ‘perfect storm’
Dairy processors such as Beston are proactively embracing innovations to survive
Despite the hurdles, investors with patience might find promising prospects ahead

The current crisis

The Australian dairy industry is facing unprecedented challenges, marked by severe financial pressures, labour shortages, and intense international competition.

Over the past 18 months, the industry has been significantly impacted by a series of natural disasters, including floods and bushfires, which have reduced national milk production to its lowest point in 30 years.

These climatic events have not only affected pasture growth, but also increased operational costs for dairy farmers and processors who are already struggling with the highest milk prices in the industry’s history.

Fabrizio Jorge, the CEO of South Australian-based dairy processor Beston Global Food (ASX:BFC), offered Stockhead an overview of the events leading up to the current situation.

“If you think about what has happened around 18 months ago, you will come across some very large natural events taking place,” Jorge explained.

“There were floods, for example, affecting the southern part of New South Wales, and also floods impacting the northern part of Victoria. These culminated in the flooding of the Murray River in South Australia.

“The series of natural events have no doubt impacted national milk production over the course of the period. And because of the reduced production, it has created effectively a shortage of dairy products domestically.”

The industry is further strained by the competitive global dairy market, particularly from New Zealand, the largest dairy exporter in the world.

Unlike Australia, where milk prices are regulated and fixed annually, New Zealand adjusts its milk prices based on supply and demand, creating a more flexible and responsive market.

This disparity has led to increased imports of cheaper dairy products from NZ into Australia, exacerbating the financial stress on local processors.

“Obviously this is very problematic for us because in Australia, processors like Beston are bound to something called the Dairy Code of Conduct,” said Jorge.

“One crucial aspect of the Code is the requirement for dairy processors to announce the milk price for the upcoming season by June 1 each year.

“This price announcement sets the tone for the entire season, which typically runs from July 1 to June 30 the following year,” said Jorge.

Establishing a fixed milk price once a year may pose challenges, said Jorge, as it doesn’t factor in fluctuations in weather conditions, or potential inaccuracies in weather forecasts provided by the Bureau of Meteorology.

That mis-prediction turned out to be precisely what happened last year.

Dairy farmers are leaving in droves

The gradual reduction in the number of dairy farmers is also playing a part in driving up milk prices.

Despite high milk prices, many dairy farmers in Australia are in fact leaving the industry.

One significant reason for this is labor shortages. Dairy farming is a labor-intensive job that requires continuous attention, with milking needing to be done at least twice a day.

This demanding schedule makes it difficult for farmers to find and keep workers, especially in rural areas where there is already a general labour shortage.

Another challenge is the ageing workforce, Jorge said. The average age of Australian dairy farmers is over 60, which means many are retiring, and there are not enough young people entering the industry to replace them.

Additionally, high land prices and profitable opportunities in the beef market are tempting some dairy farmers to switch their farms to beef production instead.

Lastly, housing availability in rural areas is limited, making it even harder to attract and retain workers who would need to live close to the farms.

“And when milk prices were higher, a lot of dairy farmers looked to take advantage of that and reduced the number of animal milking, so there are multiple reasons impacting the cost of dairy products in the country right now,” Jorge added.

The path to survival

To overcome these challenges, Jorge says dairy processors need to focus on innovative strategies, particularly around adding value to its products, as well as cutting costs.

He elaborated on the various strategies Beston is implementing to remain sustainable.

The company is now re-focusing on value addition by producing high-value products like lactoferrin, which is highly sought after in both domestic and international markets.

Lactoferrin is a protein found in milk, and is often used as an ingredient in dietary supplements, infant formula, and skincare products.

“We are literally sold out in lactoferrin, and we are expecting that lactoferrin will eventually reach anywhere around 15 to 20% of our total sales,” said Jorge.

The company is also diversifying its product lines by developing and expanding categories such as shredded mozzarella, cream cheese, and other milk fat products.

This diversification should help Beston tap into niche markets and reduce its reliance on the fluctuating prices of commodity milk, said Jorge.

Beston is also implementing cost-saving initiatives and optimising its production processes, Jorge said. These measures are essential to make its operations more efficient and mitigate the high cost of milk.

Last but not least, the company is now focusing on exports, which should reduce its dependence on the domestic market.

“We’re now supplying some of China’s largest infant formula companies, so that part of our portfolio remains very healthy, profitable, and sustainable,” said Jorge.

Patient investors could still be rewarded

Fortunately, there is hope around the corner: Next year, milk prices in Australia are expected to adjust and become more in line with global market rates.

Jorge is optimistic that a more normalised milk price environment would alleviate some of the current challenges and pave the way for a more sustainable industry.

“We are getting ready for next year, to be completely honest.

“We are seeing a surplus of milk in Australia already now. And that’s going to be important for the reset of the milk price.

“Around 80 to 85% of Beston’s cost structure is the milk price. So if we get our milk price wrong, it will be a very painful process for the whole year.

“We’re looking forward to the first of June, which is just around the corner now, and try to come up with a much more sustainable milk price,” said Jorge.

For potential investors, this scenario presents both risks and opportunities.

Although the industry is undergoing a tough phase now, the shift towards value addition and cost optimisation could position companies like Beston for long-term profitability once the milk price, and hence the market, stabilises.

Some ASX milk stocks are in fact doing well

Despite challenges, there’s still hope for the sector, with some milk companies listed on the ASX even thriving right now.

Code	Name	Price	12 mth change	6 mth change	1 mth change	Market Cap
A2M	The A2 Milk Company	7.330	38%	86%	24%	$5,299,112,143
JAT	Jatcorp Limited	0.475	32%	40%	48%	$39,551,548
FSF	Fonterra Share Fund	3.430	17%	22%	2%	$368,419,675
WNX	Wellnex Life Ltd	0.032	-20%	-20%	60%	$41,265,459
BUB	Bubs Aust Ltd	0.140	-24%	12%	-3%	$124,898,205
AUK	Aumake Limited	0.003	-25%	-33%	0%	$5,743,220
NUC	Nuchev Limited	0.165	-37%	-20%	6%	$14,854,445
HLF	Halo Food Co. Ltd	0.007	-42%	0%	0%	$2,805,388
AHF	Aust Dairy Limited	0.013	-43%	-19%	-7%	$8,402,768
MBH	Maggie Beer Holdings	0.081	-52%	-2%	1%	$28,547,634
BFC	Beston Global Ltd	0.004	-56%	-43%	-33%	$7,988,188
CLV	Clover Corporation	0.510	-58%	-41%	-2%	$85,169,664
SM1	Synlait Milk Ltd	0.425	-71%	-65%	-7%	$92,897,206
BXN	Bioxyne Ltd	0.006	-75%	-45%	-25%	$12,279,872

A2 Milk (ASX:A2M)

A2M, for instance, has jumped by 30% in 12 months on the back of its strong infant milk formula (IMF) sales in China.

For the first half of FY24, A2M delivered a positive result with 3.7% revenue growth to $812 million, and 5% EBITDA growth to $113 million.

EBITDA margin even came in higher at 13.9%.

The company has achieved a top-5 China IMF position supported by record levels of marketing, and has now improved its guidance for FY24.

For FY24, A2M is expecting revenue growth of low-to-mid single-digit percent compared to FY23, with EBITDA margin to be broadly in line.

Fonterra (ASX:FSF)

Fonterra provided its Q3 business update on Wednesday, announcing profit after tax from continuing operations of NZ$1,013 million, up NZ$20 million on pcp or equivalent to 61c per share.

CEO Miles Hurrell says the Foodservice and Consumer channels in particular had a strong third quarter with a lift in earnings compared to the same time last year.

FSF says that for the upcoming 2024/25 season, the balance between milk supply and demand is delicate, and China’s import volumes haven’t fully rebounded to previous levels yet.

Due to these uncertainties and the potential for market fluctuations, FSF said it was taking a cautious stance as the season begins.

“Our opening forecast range is $7.25-$8.75 per kgMS with a midpoint of $8.00 per kgMS,” said Hurrell.

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.